While the trade war between the US and China continued to be in the spotlight during a volatile August, tensions between Hong Kong and mainland China, along with Brexit uncertainty, garnered negative sentiment. Despite these narratives that are contributing to the volatility we have seen, markets still managed to close slightly in the green by month’s end.
Source: *Equity Indices - FTSE Global Indices in CAD, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index
August started off with an announcement via the president’s twitter account where Mr. Trump declared his intention to impose a 10% tariff on an additional USD 300 billion worth of Chinese imports, triggering a selloff in global markets. When China announced retaliatory tariffs in response, markets dropped further. A few days later President Trump recalled the tariff threat, and markets bounced back. The lesson that investors can take away from this event is that overreacting to Trump related news is troublesome as announcements can be changed and recalled quickly after they are made. An investor who sold on a Trump tweet date would have realized losses whereas an investor who stayed the course or even bought on one of those days would come out ahead of the seller.
Escalations in the ongoing trade spat and yield curve inversions in bond markets have raised market participants’ concerns of an upcoming downturn. A trade deal being reached will be of the utmost importance if Mr. Trump would like to seek re-election in 2020 and would erase much of the anxiety felt in markets currently. From a fundamental perspective a very healthy labour market and strong consumer confidence have been an engine of growth for the US economy and we believe these facets of the American economy are strong enough to support continued growth.
GDP data showed the Canadian economy posted stronger than expected second quarter growth of 3.7% (annualized) primarily due to an increase in exports. Inflation data showed that core inflation is in line with the Bank of Canada’s target. As inflation is at its target level it’s unlikely we will see any changes made to interest rates in September.
Throughout August political tensions between China and Hong Kong escalated as the number of protests increased, with some turning violent. A proposed bill that would make it easier to extradite suspects from Hong Kong to China is what fuelled the initial protests and caused activists to demand for greater democracy in their region. At the time of this writing Carrie Lam, the territory’s leader, announced that the bill has been withdrawn.
A further de-escalation of the situation is important as tensions could impact business confidence in Hong Kong. Hong Kong’s economy is a financial capital throughout Asia and is important to China’s economy as many Chinese firms look to Hong Kong’s markets to raise capital.
Elsewhere, GDP data showed that Germany’s economy slowed during the second quarter as their economy relies heavily on trade with China and it has slowed recently. The other major story out of Europe is Brexit. As we approach the Halloween deadline to exit the EU the picture remains uncertain. If a no-deal Brexit scenario materializes, terms of trade will deteriorate between the EU and the UK, the UK will end up paying higher duties, and taxes on imports will lead to a slowing of their economy. Moving forward we will continue to monitor Brexit developments as well as actions by the European Central bank and fiscal actions taken by European governments.
As the market narratives have not changed much over the past month, I will leave you with the same final thoughts: We do expect bouts of volatility to persist moving forward and we believe the global economy is healthy enough to continue its advance, albeit at a slower pace.
There’s plenty of noise in financial markets, so it’s important as investors that we don’t let it distract us, and instead stay the course and remain disciplined. Volatility is nothing to lose sleep over as it’s a normal feature of equity markets. Many of the risks discussed can be mitigated by choosing an appropriate mix of exposure to the bond markets and equity markets as well as remaining diversified across sectors and countries.
Reward yourself for your own self-discipline by checking your InvisorGPS and tracking your progress towards your goals. Think about how happy future you will be that you invested in your financial future.